New IEA Data May Indicate A Slowdown In Rig Count Drop

The IEA OMR is out early this month hence April’s edition of vital statistics comes early. The March 2015 Vital Statistics is here. EIA oil price and Baker Hughes rig count charts are updated to the end of March 2015, the remaining oil production charts are updated to February 2015 using the IEA OMR data. The main oil production changes from January to February are:

• World total liquids up 80,000 bpd• OPEC down 90,000 bpd• N America up 220,000 bpd• Russia and FSU up 10,000 bpd• UK and Norway up 100,000 bpd (compared with February 2014)• Asia up 30,000 bpd

1. Global oil production is declining slowly but remains just above its long-term trend. Just over 94.04 Mbpd was produced in February.

2. The recovery in the oil price in February reversed in March and WTI has tested its January lows. Spreading conflict in the Middle East adds further complexity to the price dynamic.

3. The plunge in US oil rig count has slowed significantly although it continues falling slowly. This may signal a new phase of the oil price war that is discussed at the end of this post.

4. I anticipate that the price bottom may be in, but that price will bounce sideways along bottom for several months until we see significant falls in OECD production. Whilst there are signs that global production is falling slowly there is as yet little sign of a significant drop in US production.

5. IEA revise data up to three months in arrears and the picture painted a month ago may change as a result of those revisions. A significant upwards revision of 300,000 bpd has been made to US oil production in December 2014. And problems remain with the reporting of UK and European production figures.

Figure 1 Daily Brent and WTI prices from the EIA, updated to 23 March 2015.

Figure 2 On 13th / 28th January Brent and WTI reached respective lows and the WTI-Brent spread closed completely. The recovery in the oil price staged in February appears to have run out of steam. WTI fell to test its Jan 28th low of $44.08 on 16th / 17th March. Brent has staged a more solid recovery. The differential price action continues to reflect gross over supply of LTO (light tight oil) in the USA with the IEA reporting all storage almost brim full. Spreading conflict in the Middle East adds an additional dimension to the oil price dynamic. It is too early to say if the price bottom is in. Stabilization of US drilling (Figure 4) may signal a continuation of the glut and more pain to come for producers.

Figure 3 Oil and gas rig count for the USA, data from Baker Hughes up to 27 March 2015. The recent top in operating oil rigs was 1609 rigs on 10 October 2014. On March 27th the count was down 796 to 813 units, a fall of 49.5%. The oil rig count is down 173 for the month of March. Not easily seen on this chart is the fact that the rate of decline has slowed dramatically (Figure 4). The decline in drilling activity has yet to show up in US oil production statistics (Figure 5). A backlog of wells already drilled are being fracked and hooked up. The decline in gas rigs has accelerated, down 47 rigs for the month of February. It will be interesting to see where the equilibrium point is struck where oil and gas production declines are held stable by drilling activity.

Figure 4 Detail of the US rig count statistics showing that the decline in oil rig count is showing signs of stabilizing. If the oil rig count stabilizes at this level it will signal a new phase of the oil price war that is discussed at the end of this post.

Figure 5 US oil production stood as 12.60 Mbpd in February 2015. The IEA has significantly revised upwards US production figures for the last 3 months by 300,000 bpd. This provides further evidence for the scale of over-supply that led to the price collapse. There is no sign of US oil production slowing let alone falling. C+C+NGL = crude oil + condensate + natural gas liquids.

Figure 6 While most OPEC countries claim very slender margins of spare capacity, the IEA have cut this margin to virtually zero in Kuwait, UAE, Qatar, Algeria, Nigeria, Angola, Venezuela and Ecuador. Note that the IEA have reported February spare capacity of 0.76 million bpd for Iran, about 0.70 mbpd higher than in recent months and this is presumed to be an error. Any hopes of OPEC cutting production are well and truly dashed as the response has been to pump flat out to maximize revenues when confronted with a collapsed price.

Figure 7 OPEC production plus spare capacity in grey. The chart conveys what OPEC could produce if all countries pumped flat out. OPEC production stood at 30.23 Mbpd in February, down a meager 90,000 bpd on January. There are signs that OPEC total capacity is in decline, a situation masked by conflict in Libya, sanctions in Iran and on-going conflict in Iraq. There is absolutely no sign of the healthy OPEC nations cutting production. Note that production in Libya is now almost zero. Under Gaddafi, Libya produced 1.7 Mbpd and had decent schools and hospitals.

Figure 8 Saudi production is rock steady and stood at 9.74 Mbpd in February, up 50,000 bpd from January. NZ = neutral zone which is neutral territory that lies between Saudi Arabia and Kuwait and shared equally between them.

Figure 9 Middle East OPEC oil rig count from Baker Hughes. While OPEC is maintaining production levels, the 14% jump in rig utilization in these gulf countries in February most likely means that they are having to drill increasing numbers of wells to combat declines in order to hold production steady.

Figure 10 Russia and other FSU oil production remains rock steady. Russia is one of the World’s largest producers with 10.94 Mbpd in February 2014, the same as January. Other FSU also ticked up 10,000 bpd to 3.03 Mbpd in February.

Figure 11 The cycles in European production data are down to summer maintenance programs in the offshore North Sea province. To get an idea of trend it is necessary to compare production with the same month a year ago. Compared with January 2014, UK+Norway production is up 100,000 bpd. Note the IEA have had reliability problems with the UK and other categories that distort the near-term picture.

The steep declines appear to have been arrested and with several new major projects in the pipeline North Sea production was expected to rise in the years ahead. The current price rout is bound to have an adverse impact and activity in the North Sea is winding down rapidly as companies enact major redundancies in a workforce who are now threatening strike action. Related: Wall Street Losing Millions From Bad Energy Loans

Figure 12 China is a significant though not huge oil producer and has been producing on a plateau since 2010. Production was 4.16 Mbpd in February up 20,000 bpd from January. This group of S and E Asian producers have been declining slowly since 2010. The group produced 7.63 Mbpd in February, up 30,000 bpd on January.

Figure 13 N American production continues to rise on the back of the revised IEA figures for the USA. At some point the plummeting rig count was expected to bite, but if the plunge is arrested at about 800 oil rigs, the anticipated production falls may not materialize.

USA January 2015 12.49 Mbpd; February 2015 12.60 Mbpd; up 110,000 bpd

Canada January 2015 4.29 Mbpd; February 2015 4.35 Mpd; up 60,000 bpd

Mexico January 2015 2.61 Mbpd; February 2015 2.67 Mbpd; up 50,000 bpd

Group production up 220,000 bpd from January.

Figure 14 Total liquids = crude oil + condensate + natural gas liquids + refinery gains + biofuel. February production was 94.04 Mbpd up 80,000 bpd on January. Note that the patterns on many charts change as a result of IEA revisions. Total liquids production now seems in decline and is just hovering above the long-term trend drawn through recent tops. The oil price will unlikely begin to stage a proper recovery until production drops well below that trend line which reflects demand growth.

Figure 15 To understand this chart you need to read my earlier posts [1, 2]. The data are a time series and the pattern describes production capacity, demand and price. My expectation was that the trend will move to the left and up when supply is eventually reduced pressing prices higher. Higher demand will then take the trend up and to the right.

Discussion

The most significant statistic this month may turn out to be the slowing of the decline in US oil rig count (Figure 4). It is too early to say. I was expecting the plunge to continue, but IF it is arrested at the level of around 800 rigs then a new ball game may begin.

High oil prices had led to industry costs going through the roof as contractors made hay while the sun shone. The price collapse alone is enough to reduce the cost base for shale drillers and frackers as skills shortage turns to skills glut and contracting rates go through the floor.

In yesterday’s Blowout, Roger Andrews linked to an interesting story about renewed efficiency drives in the US shale patch aimed at making shale producers cost-competitive at $50 / bbl. Some may take this with a pinch of salt. But should the US shale industry simply refuse to roll over and die then the ball gets tossed back to OPEC. We may see a new era of prolonged over-supply and price weakness that will be great news for consumers but bad news for many OECD oil companies grown bloated on $100 / bbl. But the big losers would be OPEC. This could spell bad news for social stability in many OPEC countries as generous welfare programs are curtailed. Parts of MENA already in meltdown may begin to vaporize.